How A “Big Bet” Remains Poised for Future Outperformance

International deep value stocks are a high-conviction, active position across all GMO Asset Allocation portfolios. We define the deep value group of securities as the cheapest 20% of the market, a broad opportunity set that allows us to construct portfolios that are cheaper than traditional value indexes but still high in quality. So far, this bet has paid off: GMO’s deep value strategies have delivered truly impressive performance, yet they remain attractively priced.

Our thesis? International deep value has shown potential for future outperformance:

Attractive valuations in non-U.S. markets as opposed to the U.S. market, which has become increasingly expensive and concentrated
Exposure to cheap currencies like the yen, euro, and pound sterling
Historically wide value spreads, meaning that deep value has the potential for strong outperformance in a mean reversion scenario.

Outperformance through active management

While each of these factors has contributed to strong recent performance, meaningful reversion potential remains. The active opportunity set for GMO’s deep value portfolios continues to be robust, supported by security selection alpha and active portfolio rotation.

Read more: Powell’s Last Stand & What Comes Next?

To illustrate, we focus on one of our deep value strategies, the GMO International Value ETF (GMOI). As shown in Exhibit 1, GMOI extended its 2025 outperformance through Q1 of 2026.

Exhibit 1: Value Was Priced to Outperform and Has Delivered

The primary driver of GMOI’s return relative to the MSCI World ex USA universe has been active portfolio rotation: the process of monetizing successful security selection by selling winners and reinvesting the proceeds in more attractively priced opportunities. We believe this rotation, an enduring feature of value groups, positions the GMOI portfolio for continued success.

Importantly, the realized relative return from valuation change remains modest. As shown by the yellow line in Exhibit 2, valuation change (the portfolio repricing and getting relatively more expensive) has contributed little to relative returns. This means the portfolio’s discount to the universe remains as wide as it was at the start of 2024.

Exhibit 2: Return Decomposition of GMO International Value (GMOI)

Relative Return Decomposition: GMO International Value vs. World ex USA (01/2024+)

A standout performance contributor: Banks

Banks provide a clear example of how security selection and portfolio rotation combine to drive alpha. At the beginning of 2025, GMO’s value models identified numerous attractive opportunities within the sector. From that point through January 31, 2026, banks outperformed the MSCI World ex USA Value index by 32 percentage points. The banks held in the GMOI portfolio outperformed the index by 56 percentage points over the same period, reflecting strong security selection.

As this excellent performance materialized, GMOI systematically reduced exposure, lowering the portfolio’s active weight in banks to -8% by the end of Q1 2026. At the same time, we reinvested the proceeds in attractively priced securities across industries and sectors, including insurance, financial services, telecommunications, pharmaceuticals, automobiles, transportation and energy. This rotation proved additive: banks underperformed the ex USA Value index in February and March 2026, while an overweight to energy helped relative returns amid heightened geopolitical volatility.

Exhibit 3: Banks—A Standout Performance Contributor

GMO International Value

Valuations still leave room for reversion

As a result of this active rotation, the portfolio continues to exhibit a substantial relative valuation advantage, despite strong realized performance. As of March 31, 2026, GMOI traded at a roughly 40% discount to the MSCI World ex-US index (on par with its relative valuation as of December 31, 2024) and a roughly 60% discount to the S&P 500.

Exhibit 4: Portfolio Trades at a Deep Discount Despite Strong Realized Outperformance

Tapping the potential

Despite strong realized performance, we believe international deep value continues to offer a compelling forward looking opportunity. Valuations remain deeply discounted, currency exposures are still favorable, and value spreads remain historically wide. Considering these conditions, it appears that much of the reversion potential may still be present.

Importantly, the opportunity is not purely about exposure to the value factor. GMO’s deep value portfolios continue to benefit from a broad and liquid opportunity set, where disciplined security selection and ongoing portfolio rotation allow us to harvest alpha while continually refreshing future return potential.

For additional perspective on this investment theme, see our Year-End Letter for 2025: Deep Value.

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Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information to the most recent month-end, visit www.gmo.com.

Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV) and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.

An investor should carefully consider the fund’s investment objectives, risks, charges and expenses before investing. This and other important information can be found in the fund’s prospectus. To obtain a prospectus please visit www.gmo.com. Read the prospectus or summary prospectus carefully before investing.

Expense Ratio of 0.60% is equal to the Fund’s Total Annual Operating Expenses set forth in the Fund’s most recent prospectus dated October 28, 2025.

The GMO ETFs are distributed in the United States by Foreside Fund Services LLC. GMO and Foreside Fund Services LLC are not affiliated.

The MSCI World ex USA Value Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of global developed markets, excluding the United States. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

The S&P 500 Index is an independently maintained and widely published index comprised of U.S. large capitalization stocks. S&P does not guarantee the accuracy, adequacy, completeness or availability of any data or information and is not responsible for any errors or omissions from the use of such data or information. Reproduction of the data or information in any form is prohibited except with the prior written permission of S&P or its third-party licensors.

Traditional value indexes are constructed by market-cap weighting a group of stocks that rank highly on traditional "value factors" such as price-to-earnings ratio, price-to-book value, and dividend yield.

High quality stocks are shares of companies with high and stable profitability, strong balance sheets, and disciplined capital allocation.

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Disclaimer: The views expressed are the views of GMO’s Asset Allocation team through the period ending April 2026 and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.